This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
The Treasury experienced vigorous internal debates before Rogernomics. One was over the purpose of taxes. Eventually, a senior economist, notorious for his common sense, settled it. There it is in the 1984 Economic Management: ‘The purpose of of any tax system is to raise revenue.’ (Of course there are other purposes of taxation such as redistribution and changing behaviour – the Treasury debate had substance.)
Fair enough; the level of taxation is the main determinant of the balance between community and private spending. There is a strong right-wing lobby arguing taxes should be lower, which means lower government spending – more private, less community. That is its political judgement, although I wish its advocates would not contradict themselves by pointing out failures of the public sector arising from inadequate funding.
Of course there are inefficiencies in government spending (as there are in private spending). Most are like the fat in prime steak: difficult to get at without destroying the texture of the meat. Even so, there is a view that this government has been sloppy over monitoring the effectiveness of its spending, but whether it is that Treasury is not doing its job or whether cabinet is ignoring it is unclear.
There are programs which might be abandoned, but usually the advocates of the cutting ignore the consequences on people. I was heartened by ACT, who when opposing free prescriptions – I don’t – went on to say the funds could be better spent in reducing GP charges – I hope they remember the tradeoff when they get into power.
What strikes me is how feeble left-wing advocacy has been in contrast to the right-wing message. The dominant rhetoric is for tax cuts; there is never the same clamour that it means public expenditure cuts too. Perhaps the left’s failure explains Labour’s unwillingness to contemplate new taxes.
The case for the taxes is not well made. Here follow some notes.
Like the Treasury, the Reserve Bank, the IMF and the OECD, I support a (real)capital gains tax while acknowledging it is administratively difficult). The concern is that the tax system is currently distorting investment decisions. I’d favour using the revenue from a capital gains tax to reduce tax rates on interest income; we should not be taxing interest’s inflation component.
I would apply the capital gains tax to second houses and very expensive first houses – say, those worth more than twice the price of an average New Zealand house. They are distorting investment too.
When I looked at wealth taxes back in the 1970s, I concluded that they were really a requirement that the rich should get a higher nominal return on their investments than others to get the same after-tax return. I am not uncomfortable with that proposition (except I concluded that income from assets on which wealth tax was levied should not also be taxed). Historically, it was common to tax investment income differently from labour income; presumably the economic logic was that the supply conditions are sufficiently different. An important effect of a wealth tax is that it would cover assets which do not earn taxable income such as houses and yachts. (Administering a wealth tax is not simple.)
When we had inheritance taxes, I supported a lifetime capital accumulation tax which is a progressive tax (with a substantial exemption) based on transfers – estates and gifts – over an individual’s lifetime instead of estate duty. Its effect encourages a wider spread of wealth since the rich can reduce their tax burden by sharing their wealth around, making wealth ownership less unequal. Estate duty was abandoned by Ruth Richardson in 1992, partly for ideological reasons but also because Queensland had already abandoned it, so one could escape death duties by migrating across the Tasman. The revenue loss was made up by reducing the state support for those in residential care.
I agree with the proposed change on taxing trusts, aligning their tax rates with the top income rate to reduce tax avoidance. However, I would treat trusts similar to corporations, where the taxation is essentially a withholding tax, so that New Zealanders who receive disbursements from a trust are not taxed, while those who pay below the tax rate would get some tax remission.
There is a fashion – even in right-wing circles – to argue for a land tax on the basis that land is immobile while labour and investment can avoid taxation by going overseas. However, most of the discussion I have seen does not cover the impact on the farm sector, which remains a key element in New Zealand’s prosperity. The proposal is usually dismissed because we already have a kind of land tax in local authority rates.
A minor issue in terms of revenue, but important politically, is that non-residents pay income tax only on their New Zealand income. (A non-resident is someone whose permanent place of abode is here or who spends not more than 183 days a year in New Zealand.) That seems sensible, except I would restrict the notion of ‘non-doms’ (not domiciled here) also to those who do not participate in political life in New Zealand by voting or funding political lobbying. Taxation is the price of citizenship.
(While chasing up the nuances, I discovered that the IRD made special provision for the non-doms who were forced to overstay their 183 days because of the COVID lockdowns. On the other hand, the MSD made no similar provision for New Zealand Superannuitants trapped overseas during the lockdown. I leave others to explain the different treatment.)
I like the proposal to have an income exemption from income tax. The exemption was removed in the 1970s because there was no GST. When GST was introduced in the 1980s, the income exemption should have reintroduced but the priority was reducing taxes on the rich so the poor were forgotten. Introducing an income exemption is very expensive and almost certainly requires higher taxes elsewhere. Even so, when consideration is given to the next round of income tax cuts, consideration could be given to reducing the bottom rate (currently 10.5%). The effect of a 1 percentage reduction would be to give almost everyone a $2.70 a week reduction, peanuts to the rich but much appreciated by the poorest. (It would cost about $500m p.a.)
There are other taxes we might consider. I am comfortable with indirect taxes which reconcile private behaviour with the public good, as we do in the case of alcohol and tobacco. I am not quite so convinced of the effectiveness of a sugar tax. Our greenhouse emissions strategy needs a total overhaul; it needs to fund the retreat from the coast because of sea-level rising and making infrastructure more robust to storms. There is also a role for user-group pays taxes where it is not easy to charge for individual behaviour. An example is the road taxes to pay for road maintenance and extensions. (Proposals for charging motorists individually go back at least 60 years but, except in special cases, implementation has proved impractical.) I am not unsympathetic to a financial transactions tax (a.k.a. Tobin tax) as a substitute for the sector not paying GST. But we should wait for others to implement it first, in order to reduce avoidance. It will, however, not generate the enormous revenue its proponents claim, since the financial sector will be smart enough to find (legal) ways to avoid paying, demonstrating that perhaps they are smarter than the FTT’s proponents.
This column has been about getting the tax structure right rather than the levels which shape the fairness of the system. It is no secret that I am concerned with child poverty. That involves a better system of child support than the current Working for Families.
This canter though some of the taxation possibilities indicates some of the complexities which the general public discussion tends to overlook. I have been explicit about my own values. Yours may be quite different. But I hope this column contributes to a public discussion which is sober and rational – rather than uninformed and hysterical – despite our differences.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
52 Comments
I have done a little research on this. I think that it would be politically impossible to bring in a CGT. If it could be done, then in my view, only real(inflation adjusted) gains should be taxed and that would further reduce the revenue.
Wealth taxes are going out of fashion. In 1995, 12 OECD countries had one, but now only 5 do. They have proved to be difficult to implement.
An Inheritance tax is perfectly feasible-I dealt with it for clients regularly in the UK, but though the UK has had one for a long time, it doesn't raise that much money. My own very rough calculation is that it might raise around $1bn here-eventually.
Why not introduce stamp duty on every property transaction? That would be very easy to implement and administer.
Agree on wealth taxes being hard to implement, but the l issue with them to me are the unintended consequences eg time and effort spent avoiding them and driving wealth creators away offshore. Ditto the inheritance tax (avoidable with some planning). Even the way PAYE is taxed is a disincentive for people to work more.
If agreed there is going to be any taxation, my vote goes for a Land (excludes any improvements such as a house/building) Value Tax. An LVT has positive unintended consequences such as the efficient use of land and it being a disincentive to hording (land banking). These unintended consequences or side effects would result in a lower cost of living for shelter - a need and the largest one in terms of cost people in NZ face.
Fortunately, for the first time in my voting life we now have one political party with an LVT policy front and centre this election. That is of course The Opportunities Party (TOP) and that's why I'm going to vote for them. Will they get in? It doesn't matter to me, I can in good conscience say I tried to make NZ better by voting for the one easily implemented policy (LVT) that would improve New Zealand more than all others.
Exactly, all these people thinking that someone like Elon musk actually generates wealth by designing, producing and selling products that people want are deluding themselves. One does not become more wealthy by taking foreign rocks and selling them to foreigners after heating, pressing & rolling them.
could you imagine if you considered local video game designers wealth creators just because foreigners pay them money to see a bunch of lights (pixels) light up in a given order when they push a button?
What are you trying to do with a LVT, you say increase efficient use of land?
I think you would find the savvy property investors would be up to date with the law and minimally impacted. Where as the average Joe tradesman etc who buys some land to eventually build a family bach would pay the price. If you have any numbers around land banking by corporations I am happy to be proven wrong.
I'm not against your logic but I think NZ history is full of examples of idealistic plans (particularly tax related) that end up doing as much or more harm than good.
I think a capital gains tax or stamp duty would be more realistically effective.
Efficient use will mean different things to different people but basically an LVT applies an additional cost on anyone who holds land eg land bankers and empty section holders. Each year the tax is due they might be more inclined (some won't - that's fine just pay the price of LVT for owning it) to do something with it (build or sell) rather than wait for the capital gains to accrue (there would be less of these anyway with an LVT). Those with an empty house for holidays or occasional use might now regard it as too expensive to keep for rare occasions and decide to rent it out or sell which increases the supply which all else being equal will decrease prices.
I want house prices and rents to fall, an LVT would do it and if done as TOP proposes the overall tax take is neutral because it's used to fund a tax-free threshold of 15k per year. There are also other benefits such as overseas owners (non-tax resident) will have to contribute tax meaning those living in NZ overall would have to pay less tax in total than they currently do.
There isn't anything idealistic about LVT, NZ has had a land tax in the past and used it to break up large land holdings - quite effectively. Stamp duties and capital gains could also raise revenue, but they come with their own side effects eg penalising someone who has to move multiple times for employment. Capital gains tax tend to be more complex than an LVT, it's more difficult to know how much is going to come in and that in turn makes offsetting it with a tax-free threshold on workers efforts unlikely. Then there are the 'loopholes' surrounding things such as the family home being exempt that get exploited and it ends up so watered down it's doesn't really do anything but create work for accountants (my assumption but you certainly cannot rely on it doing what I want which is lower the cost of housing in NZ).
Tax is supposed to represent services supplied by the government.
Low rent costs for land and food allow people to live and operate businesses with low overheads which means greater mobility and innovation. Unless a land tax was enough to significantly lower the value of land it's not going to make rent cheaper. And if it does that then you would penalise farmers who have played by the rules for decades. But TOP is not likely to poll over 50% so yeah I get the point it's an influence in the right direction.
I don't really see why the family home is excluded from cgt proposals, I think it's just to try and get votes. Cgt is a pretty convenient tax as purchase and sale price are already recorded and people generally have money if they just sold a house for profit so the tax gets paid.
Some would say tax just mops up the excess dollars moving around the economy (refer to treadlightly's post below) but that's a different matter, let's assume the Government wants to provide x worth of services then it needs to raise x amount of tax. It becomes a question of how eg LVT, capital gains tax, PAYE.
An LVT doesn't have to make rent cheaper as proposed by TOP due to it also lowering PAYE. The renters that work will pay less PAYE so have more disposable income. This is in addition to the slightly lower rents you acknowledge are likely. I think rents will go down more but even if they stay the same workers that rent will be better off.
I hope that and LVT will significantly lower the value of land for city and rural land if the rate was set high enough. By the way, TOP policy excludes rural land but I disagree and want it included for reasons in a reply to you further down this thread. Just because people have been playing by the rules doesn't mean the rules cannot be changed to make the playing field fairer going forward. Currently there are massive problems that have been building up over decades, enriching land holders at the expense of others.
I agree that if you were to do a real capital gains tax (that you had to stump up each time your property was revalued - not just when sold) then it couldn't exclude the family home in the same way a land tax I support wouldn't. I still think an LVT would be best, a broad unavoidable capital gains tax would certainly be better than what we currently have though.
Brian,
Did you ever look at taxing all income at gross level. Income tax is taxed on gross income, could corporate gross income be taxed at that level. Perhaps a 10% tax rate over all gross income maybe a simple idea. If a business can not operate successfully paying a 10% tax then should they be in business, needs an adjustment for start-ups, but a provisional tax structure for the first few years can apply.
Just a thought, perhaps it needs to be 15%, not sure. I am sure you have the skills to test this structure.
If a business can not operate successfully paying a 10% tax then should they be in business,
I read few things on this website that leave me legitimately stunned but every now and then I see something like this I'm not quite sure how to reply or where to begin with it.
I know many people think the current tax structures are very complex, and it would be in NZ best interests if there was a better way forward. So just thinking completely outside the square.
I have seen many companies who are continually run in a loss situation where those losses are utilised to reduce a holding companies tax requirements. It may be legal but is it fair and equitable, so should this be OK. Thus my statement. I understand your criticism, and it's easy to criticise but stand back a little, or better still come back with an alternative. Lets be open here.
I think you're asking me to treat your proposed 15% tax on gross profit, before all expenses and other costs with more respect than it really deserves.
I don't know what you're expecting here. Your proposal is bonkers. It's easy to criticise because it's bordering on insane. How many businesses could still meet expenses and still provide a reasonable return once you've taken 15% out of the gross at the top? There are whole industries where a single digit percentage of sales at the bottom line is considered a huge result.
If you're genuinely concerned about transferring of losses within groups, then you could pose simple tax policies to tighten up on subvention. But what you're proposing would shutter huge numbers of businesses and result in thousands of jobs being lost.
I think the suggestion was 10% not 15%.
We've had this discussion before and I support the idea for the exact reasons stated, but by my calculations for me to pay similar tax to current would be a rate of 6% or so.
Rather than throw around meaningless words could you explain why wages are taxed on gross and businesses on net.
Think of it this way. Supermarkets make 1 million a day in profit for the service they provide, this is roughly $0.20 per kiwi per day. A typical kiwi spends $100 per person per week on groceries from which the supermarkets profit $1.40 or 1.4%. Your proposed tax is 11x higher than this and would require that the price of a typical shop rise to $118 for the supermarkets to retain the same profit (about $18 going to tax). It isn’t $115 because 15% of 115 is $17.5 meaning that the supermarket would get $97.5 where they were previously getting $100. Given that their average profit was only $1.4 and that 97.5 is 2.5 less than 100 the super market would be operating at a loss of $1.1 (2.5 - 1.4) per person / shop which means they would make more putting money in a non interest bearing bank account. Ie. Your 15% gross tax would cause prices to rise by 18% if super market owners did not feel the need to maintain purchasing power and opted just to maintain the same profit. The increase rises to something like 20% to pay for a 15% gross tax if the supermarket owners would like their profits to buy them the same number of Big Macs as before the 15% gross tax.
In the supermarket example to get the same effective tax ( currently $0.392 = $1.4 x 28% ) your tax on gross profits would need to be 0.392% this will then really break down when you look at companies with low volume but high margins (supermarkets are low margin high volume - ie. making only a few cents if anything on each product you buy). A Spa seller may make $10,000 of net profit per sale and currently pay $2,800 at present whilst a gross tax of 15% on his $15,000 gross profit would only be $2,250. High margin goods tend to be luxury items this means that a gross profit tax would lower the cost of luxury items with high margins whilst raising the cost of necessities with low margins. The only party likely to back something like this at the minute are the greens, so vote green!
While I agree with the basics that the tax will affect low margin sellers the most, you perhaps could have used a better example. According to the CC report the duopoly made $430m in excess profit. The actual profit was something like 2.5 times that putting a different slant on your figures.
Even if that were the case 0.392 x 2.5 = 0.98% so your gross profit tax would need to be less than 1% to avoid raising prices. In top of this the incentive to sell low margin products drops off so supermarkets are incentivised to sell you the brand name products instead of own brand ones. $0.99 Pams tined tomatoes that cost them $0.97 would essentially stop generating a profit whilst $2 watties tined tomatoes that cost $1.2 would become more profitable.
Taxation does not raise revenue for the government to spend, it only allows the government to delete its currency again after it has been created and spent.
Beardsley Ruml was a chairman of the New York Federal Reserve Bank and had this to say about taxation,
"since the end of the gold standard, "Taxes for Revenue are Obsolete". The real purposes of taxes, he asserted, were: to "stabilize the purchasing power of the dollar", to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security".
https://en.wikipedia.org/wiki/Beardsley_Ruml
https://modernmoneynetwork.org/sites/default/files/biblio/BeardsleyRuml…
Brian, your efforts to make contribution to sober and rational discussion go beyond hope; they are crystallised & made tangible in these articles. Need it be said, thank you for your thoughts. We would be fortunate indeed to live in a country where the tenor of discourse reached this level on a more regular basis.
Let's get some facts straight.
We do have CGT, which is called "bright line test" on residential properties.
We do have a wealth tax, which is called Council Rates, and also on properties.
We have also have a income tax creep happening every year, which causing tax burdens to wage earners higher and higher.
think about it, the current tax settings is not addressing inequality issues, it's causing inequality.
sure, except those two are by nature tax on capital and gain, and tax on wealth by percentage.
Another point about tax is, One should not talk about tax without having a clear plan on how to use those tax, either wise it'll be just like the Green's tax plans, nothing but envy and punishing tax.
Governments (good ones anyway) need no such plan!
They generate revenue via tax - ideally fair taxes that NZ doesn't have - and if it collects too much they either reduce taxes and/or work with the electorate to establish where any excess gets spent .... which appears to be potholes in roads.
Let's get some facts straight.
We have a small number of highly specific and poorly enforced CGTs. We also have some highly specific land taxes based upon woefully inept criteria that are nothing more than a 40,000 foot guess of 'value'.
But we have no comprehensive CGT regime. Nor land taxes.
That's why the rich get richer. While the majority get poorer an poorer.
Two things I don't understand.
Tax exemption is very expensive. That can't be right if it's major effect is on the poor as we are constantly bombarded by the given that the poor pay no tax.
"it needs to fund the retreat from the coast because of sea-level rising "
Why, why needs. Maybe if you are only talking infrastructure but there is no way we all need to fund others seaside existence.
No. The majority do pay tax. Perhaps the majority pay no income tax after re-distributions.
A retired relative (accountant) who works in a budgetary service is incensed by such claims. They have calculated the amount of tax - through all sources (GST, roads, insurance, rates/rent, etc) - and almost all are paying tax net of any government assistance.
While I understand the argument the bit that I wondered why it wasn't mentioned was that without a tax exemption, then even the young who start working while at school will be taxed. But no mention of the principle of No Taxation without Representation? Clearly the young do not have specific representation that has any weight in parliament, thus to me this should mean they should not be taxed.
Plus at the low end of the economic spectrum, all that money not stolen in tax will still be spent so the Government will still gain through that.
However, most of the discussion I have seen does not cover the impact on the farm sector, which remains a key element in New Zealand’s prosperity.
So why are farm prices well above the value of the income streams? Because the real money is made from the tax free gain when Fred sells up.
Great for Fred if he has no kids, pain in the A### for farm transition and a real impediment for getting new blood into the industry.
A land tax would bring farm prices into line - and attract the people we need (not just cheap migrant workers and corporate owners).
Easy to see why corporates, big business and embedded family wealth do not like a property tax.
Property tax is a tax for the people...but sold otherwise
Of course he does. But the young the young Fred (who we need for freshness and innovation) can't get in. Its even worse than housing.
This is the main problem with NZ at the moment - ever inflated asset prices due to tax systems that keep benefiting the wealthy. Assets are being gobbled up by a smaller and smaller group of owners.
When will the penny drop and the people wake up to this wealth stripping is at the core of social unrest and breakdown that is occurring?
I'd be careful how you say bring farm values into line. Farm return atm for sheep and beef are something like 3% which is shockingly low for a company (although I'm sure a lot of benefits are written off) so you would need to double that for things to even look like being economic. If you halve the value of someone's farm then they are financially ruined. If the farm stays the same and you wait for inflation to do the job then it can happen.
Remember if agriculture is unviable then the country is basically broke.
I think you may be confusing the value of the farm land with the value of the farming operation. The two are valued very, very differently albeit the value of the latter is connected loosely to the former. How many 'farmers' nowadays actually own the land they farm on?
Farmers are price takers. Therefore, if the returns are shocking then the farms are overpriced. They might need to come down. Several Uncles and Aunty's were (some still are) farming. All except a few of my cousins are farming on their own because farm prices are too high.
If prices were lower, many more of my cousins could be farming on their own farm by saving wages from work done on a farm. But pretty much none are able due to the huge capital required for land. A land tax would help correct this going forward.
I agree someone that bought a farm recently with debt would likely be unviable and some would be ruined. The question is, do you continue limiting farm ownership to those already with capital just like we have with houses of do we change the rules so that normal people are able to work and save for a house/farm? I obviously want a return to land prices so that normal people who live in houses and work on farms are able to afford them. Either you continue to ruin the whole of society, or you ruin a some over leveraged landowners (there are ways to support those few if that is desired).
A tax simplification exercise is surely long overdue. A job for a right-of-centre govt you would think. Looking at you NACT. Think of how many overpaid public servants could you move on with tax simplification? Many I would suggest. I like the land tax idea. It would need some work on the living only, living & working & working only categories, but not impossible I would suggest. We have properties that would fall into all the above categories. Perhaps keeping the living only category for local governance might be helpful. Just make the rate to 1.0% of the land value which could increase [double?] local govt revenues. Then all you need to do is make council[lors] personally liable for their expenditures & bingo!
Land tax would require a change in valuation of land, I currently own 1/4 share of a piece of land i.e. cross lease. There are 4 dwellings on this piece of land with a combined land value of $2.6m, the neighbouring land is under 1 title of the same size as our combined land with one house on it. it is surrounded by intensified housing, yet the land value is $1.5m, yep a land tax is not going to make them use there land better until the unimproved land value for rates or tax is greater than the improved value.
I took this to QV and they said the land value on the rates notices includes the value of having services connected to it. If we don't change the definition to unimproved land value all it will mean is no real change to the status quo and no change in behaviour.
Good stuff, Brian.
Food for thought: In the UK, many years ago, when taxes went to 70% and more for high incomes groups, one of reasons given, and supported by the electorate. is that a few generations of 'punitive' tax rates were required to claw back the unequally taxed gains that the wealthy had experienced up until that point.
Kiwi's should consider the implications of that while we allow the disproportionately richer and older to become even more disproportionately richer ... and older. (But many younger Kiwis are too fixated on their meager inheritances. They need to do better maths and realise they're actually ensuring the mega-wealthy become the ultra-wealthy.)
Our system lacks balance - big time.
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